Microsoft said to be mulling purchase of Claria

Microsoft is in discussions to buy controversial adware maker Claria, sources say, in a move to own an advertising network to compete with rivals Google and Yahoo.

Whether a deal will happen is unclear, according to sources familiar with the talks. But in the event that it does, Microsoft would likely face guff from consumer watchdogs for buying a company known for tracking Web surfers and delivering annoying pop-ups. (Microsoft's MSN Internet arm stopped selling pop-ups more than a year ago.)

Representatives for Microsoft and Claria declined to comment on any talks.

Strategically, a buyout would give MSN several key assets. First, the Internet portal would acquire an advertising network that sells and targets promotions to people outside the MSN Network--holdings that rivals Google, Yahoo and America Online already own. As online ad sales grow by more than 30 percent annually, that is increasingly important.

"MSN can use Claria to extend its existing advertising relationships."

Second, MSN would acquire technology to personalize advertisements--search ads, banners or pop-ups--as well as tailor content to Web surfers. Personalizing the consumer Web experience is an ambition of all of the major portals, including MSN, so that people grow more loyal to one service over another.

Finally, MSN would gain access to a system with in-depth knowledge of consumer behavior on the Internet. Claria's software is installed on an estimated 40 million desktops and is designed to monitor people's actions, behaviors, likes and dislikes in order to display targeted ads. The company also operates a research division that extrapolates consumer habits over the long term. The New York Times first reported the story.

Still, Claria, formerly Gator, has a sullied history with publishers, advertisers and Web surfers. Long equated with pop-up ads, the Redwood City, Calif.,-based company makes downloadable software that's often bundled with and supports free applications like peer-to-peer file-sharing network Kazaa. It monitors surfers' habits and displays ads as they traverse the Web.

For example, it might show a pop-up page of Yahoo search ads after a user types in a search term at Google. Displaying competitive ads atop rival Web sites is one of its trademark practices and has drawn the ire of publishers such as The New York Times and major advertisers such as Wells Fargo. Claria has settled legal complaints out of court.

In the last two years, Claria has labored to overhaul its image and products. It renamed itself, published a set of best practices for adware makers, and most recently, said it has terminated a distribution deal with longtime partner Kazaa. Claria spokesman Scott Eagle said the company gave Kazaa "notice of termination" two weeks ago.

Claria has faced a lot of criticism over how it disseminates its software onto desktops, including bundling with software like Kazaa in a way that is unclear to consumers what they're getting. The company pulled its IPO plans last year.

Claria is also introducing new products that leverage its software's innate ability to track people. It has launched a product called Behaviorlink, which is designed to study consumers' habits online and then swap out untargeted ads on Web sites for targeted display ads. With the service, Claria is attempting to partner with major publishers, like MSN, to expand the number of people in its network to optimize how and when ads are shown, so they get a higher rate of consumer response. Claria also is proposing a similar service for search and personalized content.

"For this to work, it has to be on hundreds of millions of desktops so there's an improved consumer experience in advertising, search and content," Eagle said.

For MSN's part, the company has already shown interest in personalized services for its visitors. The Internet portal launched Newsbot, a news site that people can organize to their interest. It's also testing a personalized home page service called Start.com, which lets people aggregate RSS (Really Simple Syndication) feeds from across the Web. And it has introduced the MSN AdCenter, which gives advertisers the ability to research consumer behavior before planning and running a campaign.

"We think the space is important; we're interested in the idea of deeply personalized and customized Web experiences that increase the relevancy of the information people get," according to a Microsoft representative. But the representative added that the company, in whatever it does, will set rigorous controls around its products and services that give people the choice to opt in or out or restrict data that's collected.